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posted 1 year ago
The Canada Revenue Agency (CRA) is becoming more meticulous when reviewing cryptocurrency tax returns.
Monitoring cryptocurrency dealers has become increasingly important to tax authorities and regulatory bodies around the world in recent years. Notably, the Canada Revenue Agency (CRA) and the Internal Revenue Service (IRS) in the United States have adopted active initiatives to solve this issue. Identifying taxpayers during a tax audit focusing on cryptocurrency activities in Canada is difficult due to the anonymous nature of cryptocurrency transactions, which is a big challenge for Canadian cryptocurrency tax agencies.
In order to gather data on all US users of Coinbase who had transacted in Bitcoin between 2013 and 2015, the Internal Revenue Service (IRS) filed a broad summons in 2016. This summons became known as the “John Doe” summons. As predicted, the Federal Court of Canada approved an order in March 2021 enabling the Canada Revenue Agency (CRA) to ask Coinsquare Ltd., the biggest cryptocurrency exchange in Canada, for particular information about cryptocurrency dealers.
Despite first refusing the order, Coinsquare and the CRA ultimately came to an agreement whereby Coinsquare will supply the CRA with specific user data going back to 2014. With access to this data and the shared taxpayer data from the IRS, the CRA is likely to be able to identify anyone who failed to accurately disclose their cryptocurrency transactions. As a result, more cryptocurrency tax audits are anticipated.
Frequently asked CRA cryptocurrency audit queries
Recently, the Canada Revenue Agency (CRA) began the task of conducting cryptocurrency tax audits for anyone who engages in Bitcoin transactions. Taxpayers will receive full questionnaires for this audit that are 13 pages long and contain 54 questions. These inquiries deal with a variety of topics, including investments, past mining operations, possessions, wallets, and other pertinent issues. The following are a few illustrations of the kinds of inquiries found in the CRA’s crypto tax audit questionnaire:
Taxation of cryptocurrency gains
Depending on the specifics of each situation, the tax treatment of income from cryptocurrency transactions, such as cryptocurrency trading or cryptocurrency mining, can vary. The treatment of these gains for taxation purposes is based on a number of variables.
Gains for those who trade cryptocurrencies can be classified as either business income or capital gains. The decision is generally based on the parties’ intention at the time of the transactions, and it is influenced by the following elements as described in the Happy Valley Farms case:
There are normally two possible classifications for mining cryptocurrencies: personal hobby and commercial activity. According to case law, an activity must comply to accepted standards of businesslike behavior and the taxpayer’s primary goal must be to create a profit in order for it to be classified as a business. If the personal components of the activity dominate the commercial components, it is typically categorized as a hobby rather than a business.
Pro Tax Advice: How to get ready for a cryptocurrency tax audit
To ensure you have accurate information about your activities, a trader or investor in cryptocurrency should keep records of all purchases, sales, and mining. When conducting a cryptocurrency tax audit, the CRA will have the whims of any taxpayer who does not maintain accurate financial cryptocurrency records. Consequently, a taxpayer should typically keep the records of the following cryptocurrency transactions, without being limited to them:
It is crucial for miners to keep thorough records in order to make sure proper preparedness for a cryptocurrency tax audit. Cryptocurrency miners also should preserve the following precise records:
But a taxpayer is not compelled to respond to every query a CRA crypto tax auditor puts to them. In MNR v. Cameco Corporation, 2019 FCA 67, the Federal Court of Appeal upheld the lower court’s ruling that the CRA lacked the authority to compel a taxpayer to provide information during the tax audit stage. However, a taxpayer must be aware that the CRA may reach an unfavorable conclusion and suggest additional fines if they decide not to provide information during a bitcoin tax audit. It is never advisable for a taxpayer to communicate with the CRA directly, and it is strongly advised that they contact a knowledgeable Canadian crypto tax lawyer to help them prepare their answers to the CRA’s audit questionnaires and communicate with the agency. If an accountant is required, a Canadian tax lawyer may then appoint the accountant on the taxpayer’s behalf and extend the solicitor-client privilege.
FAQ:
Frequently Asked Question:
Question: Is it required for a taxpayer to respond to all of the auditor’s inquiries regarding crypto taxes?
Answer: At the initial tax audit stage, the CRA is not permitted to demand that taxpayers provide answers. But if a taxpayer declines to respond to specific audit inquiries, the CRA may infer something adverse and suggest additional fines. Thus, keeping accurate financial records and contacting a knowledgeable Canadian cryptocurrency tax lawyer to help you with the process are the best ways to get ready for a bitcoin tax audit.
Question: What does the voluntary disclosure program entail? How does it help the taxpayer?
Answer: For taxpayers who filed prior tax returns with errors or who neglected to disclose their income, a voluntary disclosure application is designed to help them admit to their errors and make the necessary corrections. For the voluntary disclosure program to be available to a taxpayer, they must fulfill the five requirements. If accepted, there are some circumstances where the taxpayer may be free from fines and obtain some interest relief.
Question: I’m currently the target of a crypto tax audit. What are the potential results?
Answer: Tax assessments or reassessments with higher tax burdens may result from a crypto tax audit. When the CRA suspects someone has made or assisted in creating a false statement or omission in a return, whether intentionally or due to circumstances that constitute gross negligence, they nearly invariably levy a gross negligence penalty with a 50% additional tax. A criminal inquiry that could result in a tax prosecution for tax evasion will likely be launched by the CRA if it determines that a taxpayer has engaged in it by fabricating records and claims.
Disclaimer:
“This article contains generic information that may or may not be up to date because it was not recently updated. As a result, it may no longer be applicable or useful. This post does not give legal advice and should not be construed as such. Each tax situation is unique, and the precise facts of your case may differ from those presented in this article. If you have specific legal problems or concerns, it is recommended that you consult with a knowledgeable lawyer for tailored guidance”.
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